CHINA REMAINS THE EPICENTER OF THE MARKETS

 China remains the epicenter of the markets China’s central bank set the daily midpoint rate for the yuan higher for a second day, in an attempt to ease fears that it is trying to weaken its currency to gain a competitive export advantage. Nevertheless, the Asian equity markets continue to tumble and the carnage seems to have no end. The recent yuan’s depreciation and the recent weak economic data added to the possibility of more bad news out of China and that it might be hard for the nation to achieve economic growth above 6.5%. Australia and New Zealand, whose economies are heavily dependent on exports to China, saw their currencies weakening further. Now the focus shifts on Chinese trade data to be released on Wednesday.

• The dollar pared gains as worries over China kept demand for safe-haven investments, despite a strong US employment report. Nonfarm payrolls increased 292k in December from an upwardly revised 252k previously, and above expectations of 200k. Even though the jobs report seems to be solid, the flat average weekly earnings point to weak inflationary pressures. The minutes of the Fed’s December meeting showed that the debate over the outlook for inflation will be crucial to determine the future path of rate increases. If the inflation data going forward do not improve, the Fed may hold off on rate increases. As a result, we will need strong data going forward to give the bulls a good reason to buy USD back.

• Elsewhere, the South African Rand collapsed at the opening on Monday, falling more than 10% against the dollar. The move was most likely flow driven, as the lack of liquidity outside the major pairs and position liquidation hurt ZAR, which has unwind most of the move. Even though today’s move was not based on fundamental reasons, the currency continue to make new record lows against the dollar as global markets trembled in response to the deepening turmoil in China and other major emerging markets. On top of that, South Africa’s President fired two finance ministers in four days raising frustration among businesses and investors with his leadership skills. Economists believe the country’s growth could decelerate for the 3rd consecutive year to less than 1% annually, as the soft demand for SA’s minerals continues to fall. USD/ZAR is likely to correct most of its extreme move today but the pair is poised to move higher.

• Today’s highlights: Norway’s CPI rate for December is expected to have slowed slightly to +2.7% yoy from 2.8% yoy previously, but to still remain above the Norges Bank target of 2.5%. The Bank has shown no significant concern regarding the level of the inflation as it is mainly attributed to the weak NOK. Therefore, market participants are most likely to watch the oil prices as a proxy for the krone’s near-term direction.

• From Canada, the housing starts for December are due to be released.

• As for the rest of the week, the spotlight will be on the Bank of England monetary policy meeting on Thursday. No change in policy is expected while consensus is that the vote will once again be split 8-1 with Ian McCafferty to maintain his call for a rate hike. The minutes of the meeting are released at the same time as the decision, which makes meeting days more interesting than before. This gives us the opportunity to get additional insights about members’ views on the UK economic outlook and future decisions, especially with the “Brexit” referendum looming and sterling testing its lowest levels since June 2010 vs USD. The minutes of the last meeting showed that the committee expected the CPI rate to have returned to positive territory and to continue rising as the effects of falling energy prices last year dropped out of the calculation. While inflation did marginally emerged above zero, oil prices fell even further since the BoE’s meeting and the country’s economic data have been mixed. That said, we will closely monitor the meeting for any hints on just how far market expectations for the first increase in the Bank rate have been pushed back.

• On Tuesday, we get the UK’s industrial production for November. Expectations are for the industrial output to have remained flat, a slowdown from October’s +0.1% mom rise. The construction and manufacturing PMIs for the same month were not particularly encouraging. As such, we see an increased likelihood for a soft industrial production figure, which could weaken GBP at the release.

• On Wednesday, China’s trade surplus is forecast to have narrowed somewhat in December, with imports once again expected to have fallen at a faster pace than exports. Both imports and exports are also expected to fall faster than the previous month, reflecting sluggish domestic demand in the world’s second largest economy. Since Australia and New Zealand are heavily reliant on exports to China, the rapid fall in Chinese imports in particular could put AUD and NZD under renewed selling pressure.

• On Thursday, besides the BoE meeting, Australia’s unemployment rate is expected to have ticked up a bit in December, after printing two consecutive months of solid employment gains. Net employment is expected to fall by 12.5k after rising 71.5k in November. Even though we would expect overall employment to have remained supported due to the holiday season demand, if the forecast is confirmed, it could weaken AUD a bit on the news.

• From Sweden, we get the CPI and CPIF for December. Both rates are forecast to have remained unchanged from the month before. In the minutes of its latest policy meeting, the Riksbank stated that there was an upward trend in inflation, but noted that the upturn is volatile and not yet on a firm footing. A possible positive surprise in the CPI rate could solidify the Bank’s view and support SEK a bit, at least temporarily.

• On Friday, the US retail sales for December are expected to have slowed from November. Nevertheless, due to the December holiday period and the low energy prices, we see a possibility for a higher-than-expected reading. This could encourage USD-bulls to add to their positions.

FED’S KAPLAN: FOUR RATE HIKES ARE “NOT BAKED IN THE CAKE”

 Fed’s Kaplan: four rate hikes are “not baked in the cake” Dallas Fed President Rober Kaplan said that four rate hikes in 2016 are “not baked in the cake”. Fed officials overall expect four rate hikes this year, according to the median of their forecasts from December. The global stock market volatility and concerns about slowing growth in China have forced the Fed to hold of raising rates before. As such this could happen again if the stock market turmoil continues and China’s slowdown don’t stabilize anytime soon. Nevertheless, the Fed official said that it was too soon to tell if the situation over China will get worse or if in few months the nation will rebound. Investors are now focused on when the next rate hike will be, with end of January being too soon as the Fed will not get enough economic data since their last meeting to justify a rate rise. Between now and March however, there might be sufficient data to warrant a rate hike. As we have noted several times, USD remains data driven, and strong data are needed to keep the greenback on a rising mode.

• Crude oil prices tumbled more than 5% on Monday Crude oil prices plunged yesterday to trade just above USD 30 pb. A world-wide glut of crude oil and worries about emerging-market demand have kept the price of oil down, and market participants now expect the price of oil to break below USD 30 and test the USD 20 zone. China’s slowdown along with the fact that drillers won’t quit pumping despite the oil glut are likely to keep oil under selling pressure, in our view.

• Today’s highlights: During the European day, the main event will be the UK industrial production for November. Expectations are for the industrial output to have remained flat after rising 0.1% mom in October. The construction and manufacturing PMIs for the same month were not particularly encouraging. Neither was the Q4 Economic Survey by the British Chamber of Commerce, which described most manufacturing sector key balances as being weaker in Q4 than in Q3. For these reasons, we see an increased likelihood for a soft industrial production figure as well. This could weaken GBP at the release.

• From the US, we get only secondary importance data. The NFIB small Business Optimism Index for December is coming out. Even though this indicator is not a major market mover, it is worth watching it due to the Fed’s emphasis on employment, as small businesses employ the majority of people in the US. Additionally, the Job Opening and Labor Turnover Survey (JOLTS) report for November is due to be released. This survey will also report the “quit rate”, which measures workers who voluntarily resign, and is a closely watched indicator of how strong the job market is. Following the better-than-expected NFP figure for December, these indicators could add to evidence that the US jobs market is on a solid ground.

• We have several speakers on Tuesday’s agenda: Fed Vice-Chair Stanley Fischer, and Richmond Fed President Jeffrey Lacker speak. ECB Executive Board member Villeroy de Galhau, ECB Executive Board member Peter Praet, ECB Executive Board member Jens Weidman and ECB Executive Board member Sabine Lautenschlaeger speak. Bank of Japan Governor Haruhiko Kuroda and Bank of England Governor Mark Carney also speak.

WTI FALLS BELOW $30/BARREL

WTI falls below $30/barrel WTI crude oil tumbled yesterday, briefly falling below the USD 30 level, its lowest intraday price since December 2003. The 12-year low price threatens the survival of a number of oil firms, as they may not be able to remain afloat at the current low prices. It also hints more trouble for major crude-producing nations, who in the absence of major energy-sector investments could experience an increase in their unemployment rates. Case in point is oil giant BP, which stated on Tuesday that it would decrease its workforce by 5% in light of the continued tumble in prices and weakening demand. There are no signs that drillers will decrease supply in the foreseeable future, especially with Iranian oil ready to enter the market and drive supply even higher. Additionally, as global demand remains weak by fears of a Chinese slowdown, oil prices as well as oil related currencies like CAD and NOK could remain under selling pressure.

• Chinese trade data stronger than expected China’s total trade activity contracted much less than expected in December. Exports fell 1.4% yoy vs expectations of -8.0% yoy, while imports also fell but not as sharply as expected. The surprising data indicates that exports may be benefiting from the yuan’s depreciation against the dollar, which has continued in the early days of the new year. The improvement in imports may reflect factories stocking up on cheap oil, whose imports rose more than 21% in December, as well as iron ore and other commodities. Overall, the December trade data have offered some signs that the economy may be stabilizing, but at a slow pace. AUD/USD and NZD/USD, which could have otherwise come under renewed selling pressure on the news, had no major reaction.

• Today’s highlights: In Eurozone, industrial production for November is forecast to have fallen, a turnaround from the previous month. Bearing in mind that industrial production in Eurozone’s two largest economies, Germany and France, also fell in November, we see a high likelihood for a soft IP print for the entire bloc as well. A possible fall in the reading could add to concerns that the slowdown in China and other EM markets has started to impact Eurozone’s economy, which could weaken EUR a bit as a result, at least at the release.

• From the US, the Fed will release the Beige Book, which includes a summary and analysis of current economic conditions in each district and sector. This will provide qualitative information to Fed officials on how the US economy has been performing after the first rate hike, ahead of the January 26-27 FOMC meeting.

• We have three speakers scheduled on Wednesday’s agenda: ECB Executive Board member Sabine Lautenschlaeger, Boston Fed President Eric Rosengren and Chicago Fed President Charles Evans speak.

AILY COMMENTARY | EQUITY MARKET CARNAGE CONTINUES | 14/01/2016

• Equity market carnage continues The start of the earnings season in the stock markets has done nothing yet to reverse the overall risk-off environment. Having already a rough start for the year, with China at the forefront of developments, US stock markets continue to decline with no clear signs for a recovery. Although only a small portion of companies have reported earnings so far, the results were overall disappointing. This risk-off environment should see demand for funding currencies intact, with currencies like JPY, EUR and CHF outpacing most other currencies. The gains against the dollar however, may stay limited, as investors remain aligned behind further rate hikes from the Fed.

• Today’s highlight will be the Bank of England monetary policy meeting. No change in policy is expected while consensus is that the vote will once again be split 8-1 with Ian McCafferty to maintain his call for a rate hike. The minutes of the meeting are released at the same time as the decision, which makes meeting days more interesting than before. With the British pound hovering near its lowest levels since June 2010 vs USD, the falling commodity prices to which the UK equity market is exposed and the looming “Brexit” referendum concern, the minutes will give us the opportunity to get additional insights about members’ views on the UK economic outlook. The minutes of the last meeting showed that the committee expected November’s CPI rate to have returned to positive territory and to continue rising as the effects of falling energy prices drop out of the calculation. While inflation turned marginally positive in November, the renewed drop in oil prices and the soft wage growth is set to weigh on the Bank’s inflation outlook. That said, we will closely monitor the meeting for any hints on just how far the committee’s expectations for the first increase in the Bank rate have been pushed back.

• From Sweden, we get the CPI and CPIF for December. Both rates are forecast to have remained unchanged from the month before. Last week, the Riksbank Board gave Governor Ingves additional powers to intervene immediately in the currency market, should the exchange rate appreciate too quickly. In an attempt to combat possible deflation and appreciation of SEK that could undermine further rise in inflation. If the inflation rate fails to pick up, or if we see a negative surprise in the CPI rate, we see a possibility for the Bank to intervene in the FX market to weaken the krona.

• In Germany, the annual GDP growth rate for 2015 is forecast to have accelerated slightly from the previous year, which could support EUR a bit, at least at the release.
•  In Eurozone, of particular note will be the release of the ECB minutes, which have never been a driver of the EUR since they started being released, but could be important this time. The ECB decided to cut the deposit facility rate at their last meeting and to extend the QE program for at least 6 more months. In the meantime, the Board expanded the assets they can purchase and decided to reinvest the proceeds from the bonds that mature. Since then, ECB officials stated that QE will run as long as necessary to reach the inflation target and that the deposit rate is theoretically not at its lower bound. What is more, Eurozone’s CPI rate failed to accelerate in December and stayed unchanged at 0.2% yoy. Therefore, we will look through the minutes for further hints if the Bank is willing to expand further its stimulus program.
• In the US, initial jobless claims for the week ended on the 8th of January are forecast to have decreased from the previous week, while the 4-week moving average is expected to have increased slightly.

• We have two speakers scheduled on Thursday’s agenda: Atlanta Fed President Dennis Lockhart and St. Louis Fed President James Bullard speak.